Superannuation funds in $10bn tug of war

Lurking behind the trend towards bigger superannuation funds in Australia is an intense fight between the not-for-profit industry super funds and the profit-driven retail super funds managed by the big four banks and AMP.

The two sides are battling for control of about $10 billion in annual contributions that are compulsorily made by Australian employers to super funds. The umpire in this fight is the Fair Work Commission which is reviewing the default fund terms of modern awards.

The industry funds come to this fight with a distinct advantage. More of their products are approved under industrial awards than the retail funds. That historical quirk could well be entrenched by the decisions of the Fair Work Commission. If the commission does not add the MySuper default products manufactured by the big four banks and AMP to modern awards, there could be severe consequences for the profit-driven side of super.

About 80 per cent of Australians are disengaged from their super and happy to have their funds go into a default option. That option could be the main account when funds are consolidated at a later date, which would lead to an outflow of assets from retail funds.

Industry and retail super funds are battling for control of about $10 billion in annual contributions that are compulsorily made by Australian employers to super funds.
Photo: Louise Kennerley

It is not clear whether or not consumers will be winners in this battle because industry funds have shown a propensity for exhibiting diseconomies of scale: in other words, as the funds get bigger the costs go up.

A recent survey by Chant West showed fees for industry funds rose because of high investment management fees and higher administration fees. The same survey showed fees for retail funds had fallen. However, the industry fund fees are about 30 basis points lower than retail funds surveyed by Chant West.

AustralianSuper, Sunsuper the big winners?

Two of the biggest winners from the review of default fund terms for modern awards are likely to be two of the biggest industry funds: AustralianSuper and Sunsuper.

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AustralianSuper, the country’s biggest super fund with about $65 billion in assets, is the dominant player for default super. It is listed on about 70 different awards as default option. The $24 billion Sunsuper is listed on about 60 awards as a default option.

It is noteworthy that some of the biggest private sector players are not listed as a default option on awards including the
Westpac Banking Corp
subsidiary BT Financial Group.

The review of the default fund terms got off to a bad start when two of the three people appointed to an expert panel were removed this month by the Fair Work Commission president Iain Ross after complaints from the retail fund lobby group, the Financial Services Council. Ross was forced to remove Stephen Gibbs and Vikki Allen from the panel after Gibbs disclosed he was director of Australian Ethical Superannuation and Allen disclosed she was a director of Motor Trades Association of Australian Superannuation Fund.

Ross said in a ruling handed down on March 11 that the conflict for Allen was that MTAA Super has an authorised MySuper product. Ross said it was possible Gibbs’s director duties at Australian Ethical could conflict with his duties.

The two experts, originally appointed by Opposition Leader
Bill Shorten
, were replaced by economist Tim Harcourt.

Another expert panellist Arthur Apted revealed he recently became the owner of a new company IPIF Management which has been established to sponsor and manage a new sector-specific investment fund for rich Australians and self-managed super funds. But he said it will not be selling products eligible for MySuper.

The review of default fund terms in modern awards is part of a complex and bureaucratic process to determine who will get the super guarantee money flows.

First, a fund manufacturer must apply to the Australian Prudential Regulation Authority for authorisation. The next step is to apply to the Fair Work Commission to be included in the default super list.